Senior Economist, EBRD

EP SME policy

Capacity Building Seminar, Trento, 25-28 October 2011

Principle 6: Facilitate SMEs’ access to finance and develop a legal and business environment supportive to timely payments in commercial transactions

Sources of external finance for SMEs Legal and regulatory framework

Reflecting the barriers to access to finance for SME Indicators are divided in 3 blocks EBRD works in all three dimensions

Other factors that affect demand and supply of finance: financial literacy

Are sustainable microcredit facilities available to SMEs? Is leasing developed as an alternative source of finance for

SMEs? Is there an established legal and regulatory framework for microfinance and leasing?

Is there an active and functioning stock market for companies

with low capitalization, with fully enforced securities legislation in place? Is private risk capital available?

Are the various credit guarantee schemes targeted to market

failures? Are they effective and privately managed ?

Are sustainable start-up funding facilities available for targeted social groups such as female and youth

entrepreneurs?

Is there an established system for the registration of both immovable and movable assets? Are SMEs allowed to use

movable assets in their efforts to access bank finance?

Are the creditor rights protected. Can creditors recover the collateral in case of default?

Are credit information services in place, what is their coverage, and is the information available to financial institutions and to

the public?

Is a central collateral registry covering bank loans in place? Are the collateral requirements for small loans flexible?

Is there a national strategy in place to assess current financial literacy? Does the government promote financial education programmes?

Through bank loans, micro and small business

programmes EBRD supports the financial sector

and SMEs in the region

Source: EBRD Website/ Financial Institutions 2010

Projects by region Portfolio breakdown

• Financial Sector accounts for one third of EBRD activities

• Supporting SME lending is the main focus of its investments in banking sector

Financial Institutions Portfolio by product Group in

Eastern Partnership Countries

Bank

Equity

Bank

Debt

I&FS Small

Business

Finance

Total %

Armenia 11.7 39.1 5.5 32.5 88.7 1%

Azerbaijan 10.8 64.5 0.5 44.2 120.1 1%

Belarus 3.4 65.6 0.0 38.2 107.2 1%

Georgia 89.1 196.7 1.6 14.7 302.1 4%

Moldova 4.0 79.2 1.5 6.2 90.9 1%

Ukraine 25.6 1015.8 33.1 19.4 1093.9 13%

Total 144.7 1460.8 42.2 155.2 1802.8 21%

Source: Financial Report 2010

I&FS: Insurance & Financial Services

EBRD works with a significant number of banks in each country,

which account for the majority of asset market share in the sector

Compositions of Financial Institutions Portfolio in

Eastern Partnership Countries

Source: Financial Report 2010

I&FS: Insurance & Financial Services

Activities in the banking sector dominate

EBRD support in legal and institutional environment

for SME lending

Armenia Azerbaijan Belarus Georgia Moldova Ukraine

Cadastre

Credit Information

services

Registration

system for

movable assets

X X

Collateral and

provisioning

requirements

Creditors rights X X X

Source: EBRD Legal Transition Programme/ Legal Reforms projects (1996 to March 2011)

• Direct support to legal reform and institutional development

• Surveys, studies and recommendations

Through its investments on equity Funds …

Portfolio by region

Industry breakdown

Source: EBRD Website/ Private equity 2010

… EBRD has become the largest private equity

funds investor in the region

With commitments of over €2.7 billion as of December 2009

EBRD’s portfolio of funds: over 15 years of investing in the asset class:

125 funds

81 fund managers

EUR 2.68 billion in commitments (USD 3.26 billion) to funds with capital of EUR 13.54 billion (USD 17.01 billion)

1,116 underlying investments, up to 70% exited.

Largest PE Fund investment program dedicated to the region*

Products offered: venture capital, growth/buyouts, mezzanine finance, turnaround and special situation funds and funds of funds.

Both regional and country specific funds

Both generalist and sector specific funds

Note: EBRD tracked portfolio only to end December 2009, excludes real estate funds

* Russia, CIS and CSE

Involvement is guided by the Assessment of

Transition Challenges (ATC) and Firms, Banks,

Households, and Legal Environment surveys (LTT)

Tools

LiTs (household survey) and LTT (legal transition surveys)

ATC

Annual internal

assesment of remaining

challenges in a

sector/country in

relation to developing

well functioning market-

based structures and

market-supporting

institutions.

BEPS

Banks perspective

A survey to banks to

assess the

environment and

obstacles for bank

lending and

development (2004)

BEEPS

Firms perspective

A joint initiative of the

EBRD and the WB

group to assess the

environment for private

enterprise and business

development (every 3

years).

Source: EBRD Website

Access to Finance a Major Obstacle for Enterprises

(firms’ perspective)

Source: BEEPS 2009

More than half of firms across the region perceive access to finance a moderate

to very severe obstacle The Caucasus

-3

7

17

27Access to finance

Land

Business Licensing and permits

Corruption

Courts

Crime

Customs and trade regulations

ElectricityEducation

Labour regulations

Political instability

Practices of competitors in the

informal sector

Tax administration

Tax rate

Transport

Armenia Azerbaijan Georgia

Eastern Europe

-5

5

15

25

Access to finance

Land

Business Licensing and permits

Corruption

Courts

Crime

Customs and trade regulations

ElectricityEducation

Labour regulations

Political instability

Practices of competitors in the

informal sector

Tax administration

Tax rate

Transport

Belarus Moldova Ukraine

EBRD supports access to finance and building

capacity of financial institutions to lend to SMEs

Examples of different EBRD models to address challenges

and market failures in bank lending to MSMEs

The Russian Small Business Facility (RSBF)

Tajik Agricultural Finance Framework ( TAFF) AND

Georgian Agricultural Finance Facility (GAFF)

EU/EBRD SME finance facility

Financial Sector Frameworks for the region

Lessons learned

The Russian Small Business Facility (RSBF)

Main Characteristics:

Established in 1994 with the support of G7 countries and Switzerland

• provides short and medium-term financing

targeted to micro and small enterprises

Through this program the EBRD • contributes to institution building within

the Russian financial sector by providing

training and technical cooperation to banks

to develop their long-term capability to

provide small and micro firms

The RSBF includes Co-financing to Russian banks for on-lending to MSEs

( via the Investment Special Fund)

technical assistance funding to develop these financial

intermediaries and strengthen their lending capacity ( via the Technical

Cooperation Fund)

Tajik Agricultural Finance Framework ( TAFF)

Context: Agriculture is one of the most important sectors of the Tajik economy, accounting for 25 per cent of the country’s GDP and providing employment for 65 per cent of its population. Cotton is one of the main agricultural crops in Tajikistan.

TAFF: Funded by the EBRD's multi-donor Early Transition Countries (ETC) Fund, the US/EBRD SME Financing Facility and Luxembourg (EUR 2.4 million) in late 2007

• provides credit lines to local banks and MFIs for on-lending to farmers to fund their seasonal working capital requirements

Through this program the EBRD • provides training to banks with skills for agriculture finance

• provides small farmers with training for increasing their agriculture productivity

New lending products:

Individual credits

Mutual Group Lending: recommended for groups of small farmers

Institutional group lending: for small-size farmers already involved in institutional groups (consumer

cooperatives or water user associations).

Value Chain Finance: loans are based on a tripartite agreement between lending banks, farmers and

agro-processors/off-takers

EU/EBRD SME finance facility

Context: “In April 1999, the EBRD and the European Commission launched the SME Finance Facility for micro, small and medium-sized enterprises operating in the EU Accession countries of central and eastern Europe”

Collaboration with the European Commission to expand SME finance in the 10 central and eastern European countries that joined the EU in 2004 and 2007, and Croatia. EU grant covering performance fees and technical assistance

€716 M EBRD Loans

SME finance facility €846 M through Leases

€130 M EU Private equity funds

Targeted enterprises: small enterprises with up to 100 employees and micro enterprises with less than 10 employees

Technical assistance to support capacity building of banks to lend to SMEs; performance fee; interest rate subsidy; first loss guarantee, all phased out over time

The facility focus changed to target SMEs in rural areas as market developed

Source: EBRD website

The Armenia Multi-bank Framework Facility

In 1999, the EBRD established a EUR 10 million Armenian Multi-bank

Financing Framework Facility (AMBFF I). In March 2006, the second

framework was approved by the board ( USD 40 million extended to

USD 80 million in 2007 and to USD 100 million in 2009)

• support sustainable development of the Armenian banking sector

Objectives • provide equity and debt financing to leading financial institutions

• Promote loans in local currency and attract syndication partners

TC component

13 banks and one non bank financial institutions have benefited from financing under the framework

33 projects for over USD 190 million

Lessons on effectiveness of incentive schemes for

developing bank lending to SMEs

Ensure sustainability of bank lending to SMEs -minimise market distortions (incentive schemes only temporary):

1. Build local capacity through training to implement SME targeted lending projects.

2. Commercial sustainability (commercial-based lending)

3. Minimum interference from the government

Subsidy and technical assistance at the receiving financial institutions is more effective than interest rate subsidies (which introduces market distortions)

Readapt the strategy once objectives have been achieved to new market conditions and challenges—particularly with phasing out incentive schemes and targeting new market segments

SME/MSE financing projects should be embedded in a broader framework, which also addresses the legal and supervisory framework for such activities and institutions.

Conduct frequent and active policy dialogue with the relevant authorities to improve the investment climate.

EBRD TAM/BAS Programme Supports SME

performance, their financial literacy, and bankability

TAM/BAS Programme is a “technical assistance programme that combines

technical assistance at an enterprise level to viable micro, small and medium-

sized enterprises (MSMEs) across a broad range of industry sectors in the entire

EBRD region”.

More than 11000 projects

Total project value: 1.45 € billion

TurnAround Management (TAM): 1830 TAM projects involving over €116 million

in donor funding.

Business Advisory Services ( BAS): 9500 projects working in 22 countries and

mobilising 95 million of donor funding

RESULTS: “On average, productivity of these client companies has increased by

almost 30 per cent at the end of TAM projects, while turnover has increased by

over 30 per cent in the case of BAS. Some 91 per cent of TAM projects are rated

satisfactory or higher by independent evaluations, while for BAS projects the

figure is 95 per cent.”

TurnAround Management ( TAM) Programme

TAM Programme helps small and medium to large sized enterprises transform themselves. It focuses on structural changes and developing business skills at senior management level.

TAM’s advisory services are provided by experience CEOs and directors from economically-developed countries (database of over 3,000 Senior Industrial Advisers (SIAs) and specialists):

Management and technical know how

principles of responsible corporate governance

Enterprises

TAM is managed on a not-for profit basis, using donor funds to support the projects. About 50% of funding is provided by the EU. The remainder comes from individual donor countries or groups of donor countries. No funding is given to the enterprise directly.

Source: EBRD/TAMBAS website

Business Advisory Service ( BAS)

BAS Programme co-ordinates networks of business advisors to assist small and medium sized enterprises to improve performance on narrowly-based, specific project with a rapid payback.

Enterprises can apply to BAS programme for assistance in:

1. Management information systems

2. Strategy development

3. Business planning

4. Mk research/ Marketing planning

5. Cost accounting/cost reduction studies

6. Engineering studies

7. Energy efficiency and environment related advisory services

8. Quality management and certification systems

9. Business partner and investor search

Source: EBRD/TAMBAS website

Thank you!